The Price of Blown Glass: Opportunity Cost and Demand Elasticity

A puzzle. My nephew has switched to making art glass full-time, and I think his work is gorgeous. His problem, though, is figuring out what price to charge. Among other things, he blows gorgeous candlesticks, which he thought of selling for $70 a pair. I say he should charge $250 a pair. He says no, because he thinks he can sell many more at the lower price.

He assumes it takes one hour of his time to blow a pair after he’s done the first pair, and incurred the fixed cost. So I guess his decision depends on the opportunity cost of his time and the elasticity of demand for his product. Clearly, there is a set of combinations of the cost of his time and the expected change in quantity sold that would make him indifferent between the high and low prices, with a higher opportunity cost requiring a higher demand elasticity if the price is lower.

Given the two prices, what is this set? And what do you think the demand elasticity actually is in this case? (HT to SEH)

I agree with you, charge the higher price – since it takes an hour to make a pair, there’s not much benefit to producing in volume. Additionally, price is a signal to consumers that indicates quality. If there is not a lot of competition -and I assume there is not- he should try to position himself as a premium product. Does he include a unique signature somewhere on his candlesticks? Doing so would move his product from a commodity/mass-produced product image to an artisanal product image, which will allow him to charge more, and probably be happier. Dale Chihuly prices not based on volume, but on perceived quality, and that’s a great market niche to be in. If one produces based on volume, eventually you will fall into a price war with someone who has a cheaper cost structure.

From the sociologist’s pov: People who have money to spend on such things will pay $250 and more for hand-blown glass. People who don’t will get candlesticks at the dollar store, if they bother with candlesticks at all. He’s shortchanging his own work AND the work of other artists if he sells his candlesticks at mass-production prices. The price shouldn’t be for his time, it’s for the skills and ability to do this work that 99.99% of people don’t have.

Of course he should charge whatever the market can bare. To find that you start off at the lower price and if the good flies off the shelf you raise the price until you can no longer sell what you make. Working the other way, starting high and dropping the price, only encourages people to try to wait you out in a microeconomic form of a deflationary spiral.

That being said I would hope that the price ends up being the lower one as hand crafted art is ridiculously expensive. People who pay high prices for decorative an artistic goods are only subsidizing someone’s poor life choice. Being an artist is a signal that someone has no skills that the labor market actually values and therefore they have a very low opportunity cost of their time. If consumers were to behave rationally they would simply wait out the artists until the artists’ rent came due or they got hungry and the artist would be forced to sell at a price that actually reflected the marginal cost of the materials and the justifiably low value of their time.

I actually know a lot of part time artists who sell their work and I find it economically offensive how the pricing often has no relationship to the time the art takes to create, or the quality.complexity of the work being created. It’s like they are throwing darts at a price board and I have absolutely no idea how they manage to stay in business. Like I said I blame consumers who will plunk down more for a painting than they will for a flat screen HDTV. HELLO…a TV can show ANY PAINTING EVER….a painting will just show ONE THING FOR EVER. I’d actually support WalMart finding a way to put downward pressure on the price of hand crafted art. After all, they did it for hand crafted organic food.

You are exactly the type of person that artists don’t sell to. If you want your mass-market stuff, then shop at Wal-Mart. Art pricing is not about how much time and materials cost, it’s about exclusivity. Anyone can have a mass-market piece of art, but very few people will ever have one-of-a-kind, hand-made blown glass candlesticks.

Besides your insulting statements about people’s lifestyles and personal choices, the items are in the luxury category. No one ‘needs’ $250 hand-blown glass candlesticks, but if they value the work and can afford, and are willing to pay for the artistry, then they aren’t going to wait for the rent to be due and prices go down.

The question is what will make the price more elastic or less elastic. Of many factors, one of the things people would be looking before paying $250 is the brand value. So brand value contributes towards price elasticity. Good brand value will make price less elastic. He can charge $250 if he is sitting in Murano island (Venice) without marketing his product as premium but in Austin, Texas or in most places in US not famous for their glass work, he needs to convince people why his product is premium and why is it worth more. This will require some marketing budget which I assume he lacks. So the price to maximize profits probably lies between his $70 and your suggested $250. But let him start with $70. See the demand of the product and then adjust the price accordingly. Unfortunately, its going to be trial and error but even Apple had to go through it (remember $600 for iPhone with two year contract).